For eBay, It’s About Political

Connections in China

Wang Lei Lei, chief of TOM Online, will run the joint venture that was announced with
eBay head Meg Whitman on Wednesday in Shanghai.Credit...Aly Song/Reuters
By Keith Bradsher
Dec. 22, 2006

HONG KONG, Dec. 21 — EBay’s decision to close its Web site in China and take a 49
percent stake in an e-commerce venture with a Chinese company is the latest sign that
local knowledge and connections matter in the Chinese market.

While eBay’s new partner, TOM Online Inc., has suffered a series of commercial setbacks
in the last three years, no one questions that it knows the Chinese market and has political
influence.

TOM Online has been a fairly small, struggling company until now. It earns nearly 90
percent of its revenue from providing cellphone services, mainly sending the latest
entertainment news and weather in short text messages or multimedia messages to
cellphone users. Most of the rest of its revenue comes from advertising on a Yahoo-like
Internet portal that specializes in Chinese entertainment news.
The company’s heavy dependence on value-added cellphone services, without actually
being a cellphone service provider, has made it especially vulnerable. Over the last couple
of years, Chinese regulators have stepped up their policing of the industry to crack down
on certain billing practices and what officials call “inappropriate” content and other
unwanted services.

Last summer, to ensure that customers really wanted a value-added service, all companies
were required to offer free trials and to require two customer confirmations before
starting a service.

TOM Online had to adjust its subscription services, and so it was especially hard-hit
because such wireless service accounts for so much of its revenue. Profits at TOM Online
promptly plunged 59 percent in the third quarter from a year earlier as a result, to $5.28
million, while revenue dropped 15.2 percent, to $38.95 million.

The company’s reliance on such services has prompted some experts to question how it
will fare in electronic commerce. “TOM Online’s line of business is not compatible with
eBay’s,” said Liu Bin, an analyst at BDA China, a technology and media consulting firm in
Beijing, and “they will need some time” to learn to work together.

But while TOM Online may be struggling now, it has the political connections that remain
crucial in China. Li Ka-shing, Hong Kong’s wealthiest tycoon and a man who has
cultivated close relationships with top Communist leaders on the mainland for decades,
controls the company. Wang Lei Lei, the chief executive of TOM Online and now the chief
executive of the joint venture, is the grandson of a People’s Liberation Army general and
known for his political connections.

Mr. Wang presented the broad reach of TOM Online’s cellphone services — the company
says it serves 70 million subscribers — as an asset. “TOM Online brings tremendous
expertise in wireless and reach in China to the joint venture,” he said at a news conference
Wednesday in Shanghai.

Shares of TOM Online are traded on the Growth Enterprise Market in Hong Kong and on
Nasdaq. But the company itself is based in Beijing, which is crucial at a time when Chinese
leaders are starting to become more cautious about welcoming foreign investment.

“The central government must maintain absolute control over industries that concern
national security and economic safety,” said Li Rongrong, the director of the Chinese
government’s powerful State-owned Assets Supervision and Administration Commission,
at a news conference in Beijing on Tuesday. He cited telecommunications as well as civil
aviation, shipping, power transmission, coal, petrochemicals and armaments.

EBay has already run into problems in China from not being a Chinese company. By
requiring domestic control over financial services companies, Chinese regulations have
limited the financial transactions that eBay’s payment mechanism, PayPal, can offer. The
Chinese government plans to issue 10 licenses next year for online financial services, but
is widely expected to grant them only to companies in which Chinese partners exert a high
degree of control.

Meg Whitman, eBay’s chief executive, acknowledged the issue during the same news
conference in Shanghai that Mr. Wang addressed. “We will see what happens over the
next few weeks and months,” she added, “but we are very committed to PayPal here in
China.”

Ms. Whitman also suggested that TOM Online was a natural partner for eBay because
TOM Online already owned 51 percent of the Internet phone service Skype China while
eBay owned the rest. The joint venture, TOM-Skype, formed in September 2005, has
more than 15.5 million registered users, and is gaining new ones at an extremely rapid
clip.

With decisions made in China and California, eBay also reacted more slowly in China than
its rival, Alibaba. Three years ago, Alibaba set up a rival electronic commerce site, Taobao,
which has since passed eBay to dominate the market through steps like taking the lead in
eliminating user fees.

This week Alibaba welcomed eBay’s new approach. “We have long expected that eBay
would change its model in China, and a dramatic change would be a great thing for eBay
and Alibaba, because rather than competing, we would rather focus on cooperation
between eBay U.S. and Alibaba’s international Web site,” said Porter Erisman, a vice
president at Alibaba.

“More and more eBay power sellers buy in volume on Alibaba and sell on eBay U.S., but
the competition between Taobao and eBay in China has always prevented deeper
cooperation. So any new deal where eBay changes its model in China would be great for
both companies because we now can work out ways to cooperate,” he added.

The TOM Online alliance could help eBay move more quickly, as Mr. Wang has a
reputation for decisiveness and blunt words. In one of TOM Online’s many efforts to find
a winning formula, the company set up a unit in 2003 to offer multiplayer online video
games, only to shut it down the next year when it failed to gain market share.

Duncan Clark, the chairman of BDA China, said the contrast between TOM Online’s quick
commercial reflexes and eBay’s slower moving search for consensus among executives in
China and California was easily apparent at two recent meetings.

When eBay managers gathered at the Grand Hyatt in Shanghai, they rented a large room
to hold what they labeled as a “town hall meeting” for a discussion of business plans by a
large group of local managers and executives flown in from California, Mr. Clark said.

But when Mr. Wang recently attended a separate investor conference also held in
Shanghai and was asked what happened to employees in the online game division when
it was closed, he bluntly said that he fired them, Mr. Clark recalled.
A TOM Online official said that some employees may have lost their jobs then, but that
the company tried to find jobs for the employees in other divisions.

To be sure, the initial size of the joint venture between eBay and TOM Online is tiny: eBay
is contributing $40 million and its fledgling Chinese operations in exchange for a 49
percent stake in the joint venture. TOM Online is contributing $20 million and its
management expertise and relationships with Chinese regulators and other officials in
exchange for 51 percent of the joint venture. Having occupied a commanding position in
the Chinese e-commerce market as recently as 2004, eBay is now in the position of being
a global Internet giant reaching out for local help to what is, by comparison, a small
Internet player.

But Ms. Whitman was careful to present the deal in more positive terms.

“We don’t see it as a failure,” she said. “We see it as an evolution of our strategy here in
China.”